CTA Case No. 4270 (Decision)

RIPUBLIC Of THI PHILIPPIMIB COURT OF TAX APPEALS QUIZOM CITY RENATO L. LIBORO, Petitioner, - versus - C.T.A. CASE NO. 4270 COMMISSIONER OF INTERNAL REVENUE , X- - - - - Respondent. - - - - - )( D E C::: X a X 0 N This case comes on a pr�cise question of whether or not the loss sustained in earning the professional fees as an individual law practitioner can legally be deducted from or offset against the share or� income as a prac: tic ing partner in a 1aw office. Petitioner for the year 1980 declared a deductible los s of P18,115.64~ incurred in e~rning P94,500.00 as prt::>fess .iona 1 fees, from his partnership share or income from the Altavas, Liboro & Daza Law Office. Respo~dent Commissioner of Internal Revenue disallowed the deduction on the ground that loss is not connected with a 1 ine of business different from the business from whic:h petitioner earned his partnership share of P~~,085.01. Accordingly, petitioner was assessed a

DECISION CTA CASE NO. 4270 - 2- 1980 def ic iency income tax i n a l e tte r dated No vember 3 0, 1985 wi th a d e ma n d f o r th e payment of P14,009.84 computed as fo ll ows: Net income per retum as audited ~,06.3 .84 Proposed unallo.-sble deduction and additional income: Schedule 1 - Schedular loss 18,115.64 (BP Blg. 41 not dedLctible) ............... Medicare - Excess ---~5.40 (P1,985.40 - P1,0l~).OO) 19,101.04 Propo15ed adjusted income ���.��..�.�������� 57,164.88 Less : Personal and add ' l exemption �� . ��..� _.9J~!.oo Net i nc ome subj ec:t to tax .� � � . �� � � � ��.���� 51 , 164.88 I ncCJt'llE!: ta~-t c:ft..te t~r-ec:x1 � � � � � �� � � � �� � ������� 14, 273 .00 Less : ~nt already assessed/paid ��� �� � �� 6,~~.43 [)ef i c ienc y incc::wnF.? taN . .... . . ..�.. ..... . �.� 7,677.~7 Plus interests .... . ..... . .. . . . ........... . __'L._ifJ6. ~ P12,284.11 Plus : E:-:panded Withholdi ng Tax an Rental of: P18, ..:!�.:\. 2.28 x s-1. P916. 61 2 5/. surcharge � ..�.. 2.::.'9 .15 Interests � � � . ..�.�� 549.cr7 Compromise 30.00 __ _l.J~~-rr� lUT?'L IE="ICIEI'CY TAX a..E P14.009.84 -�==: =====::z On December 19, 1985, petitioner protested the deficiency assessment as consequenced by the disallowance of the los s. Respondent denied the same on May 11, 1988 for lack of legal basis and the inapplicability of the availed Tax Amnesty under Executive Order No. 41 which only covers tax liabilities for the y e ars 1981 to 198~.

DECISION CTA CASE NO. 4270 - 3- He n ce , the instant petit ion fo r review . In a s sa i ling the l egality of the assessment pa rt i cularly the d isa ll o wa n c e of the loss of P18,115.64 suffered in e arn i ng hi s pr of e ssional fees of P94~500 .00 as an individual law pra c titioner~ (Sc h e dul e 1), In c ome Tax Ret u rn) from hi s pa rtnership shar e o r in c ome of P5~, 0 35 .01 in the Altavas~ Liboro and Da:z a Law Office (Schedule 4, ibid.), petitioner a v ers that the prohibition in Section 30, infra~ against the d e duction o f net los s from othe r sources of i ncome does not apply. The natu r e of t he in come while repo r te d in the two separate Schedul es 1 a nd 4 is t he same, being der i ved from the p rac t ice of law wh i ch is a single activity, accented by the fact that he was the sole partner who generated a lso the income attributable to the law partnership considering that Altavas Mas deceased and Da za ~ on l e a v e in the year in question. By and large~ r es po ndent ' s unvarying assertion is that "While literally the two acti.vities of the petitioner may involve the ' practice of law' as an individual practitioner and as a practicing partnmr of the A1 tavas, Li boro and Dazi\ Law Of 1 ica, th� gross income for taxation purposes ci\nnot however be c onsidered as coming from the same source of

- DECISION CTA CASE NO. 4270 - 4- income or 1 ine of bLt s in e s s . Income derived from indiv:i.dual practic e of the 1 aw profession is certainly different fr om the share or income in the law partnership. To uphold petitioner ' s claim that said in c ome is d erived from only one s our c e~ that is, the practice of law, will defeat the very purpose for which the a mendme nt introduced by Bata$ Pambansa Blg. 41 in Se ction 30(d)(1)(A) of tha Tax Code, was enacted, to wit: to prevent "unscrupulous individuals by creating sham businesses from which they manage to create arti f ic ia 1 or paper losse5 for the purposes of reducing their taxable net income from other sources." (Explanatory Note, Congressional Journal, August 30~ 1979, p. 866). Be that as it ma y , the case presents no dispute as to the relatively simple material facts but the parties s e em unabl e to getting their acts together over by a qu i bble a s to the legal moorings of the deductible loss es in Section 30 of th� Tax Code~ insofar as pertinent reads1 Sec. 30. Deduction from gross income. In computing net income there shall be allowed as deductions XXX HXX (d) Loss es: ( 1) By individual s . In the case of individual, losse s actually sLtstained

... --~-- DECISION CTA CASE NO. 4270 - 5- during the ta >:ab 1e ye a r a nd not compensated for by insurance or otherwise. (A) If incurred in trade, profession or businessa Provided, however, That a loss representing the excess over the income, of allowable expenses and other deductions directly or proximately attr i butable or related to the produc tion or earning of such income from a particular line of bus iness or activity~ shall not be allowed as a deduction from or of'fset against income derived from other sources. xxx. Let it suffice, the sprouting impression precipitately broached by the petitioner that the two sums of gross income reflected in Schedules 1 and 4 in the Income Tax Returns belong to one and the same line of business or activity can hardly be r�eassuring prospect that c an easily be reconciled with the statutory i nte ndme nt. Going by the provision of Section 3 0~ ;.:;upra, the net operating loss which comes from a part i c ular line of businesB or activity including the prac tic e of a profession, cannot be allowed a s a de duc tion from income of othe r sour-ces. Such d .i st .i nction has to be taken insofar as the question of taxatidn is concerned. And, brought to bear upon the circumstances obtaining, the loss of P18,115.64 ci\llegedly suffered by the petitioner in eci\rning his professional fees of P94,500.00 ci\s an individual law practitioner should not be permitted to shelter 40

- .. DECISION CTA CASE NO. 4270 - 6 -� his share or income of P55,085.01 in the Altavas, Liboro and Daza Law Office. This seems to be the import and sense of the statute as the two sums of gros s income (Schedul es 1 a nd 4) were derived from different sources. Ludicrous and expedient piffle, indeed, if the gross income of the petitioner may not validly be infused cognizance aa derived from pursuits much closer to separate treatment than single activity within the contemplation, unless petitioner is unwilling to take the responsibilities or simply unable to discern what they are. Petitioner's posture comes as a convenient crutch for an obvious shortcoming. Certainly the law requires no more and expects no less, hence, the d e fi c iency assessment must be c: onf irmed. WHEREFORE, finding the petition to be without merit, the same is hereby dismissed at petitioner's costs. SO ORDERED. Quezon City, Metro Manila, March 29, 1991. ~YES Presiding Judge 41

....... '* DECISION CTA CASE NO. 4270 - 7- C~CIUIN Judge Acting Associate Judge CERTIFICATION I hereby certify that this decision wa5 reached after due consultation between the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. iding Jud Court of Tax Appeals 42